Real estate and the Illinois Civil Union Act

June 28, 2011Estate Planning, Living Trusts, Real Estate-Purchasestsammons

It used to be that only married couples could hold title to their primary residence as tenants by the entirety. The advantage of this form of ownership is that the property is protected from creditors if one spouse is sued or files bankruptcy (it’s not protected if both spouses get sued or file for bankruptcy).

Now, under the new Illinois Civil Union Act, couples can hold title to their residence as tenants by the entirety, just like married couples. So what is the best way to hold title to real estate for couples united under the new civil union act?

There are at least two options:

1. Tenants by the Entirety. This means that if one dies it snaps to the other avoiding probate. On the second death, however, a probate will be necessary to transfer title unless the property is transferred to a trust in between. The property is protected from creditors. I like this form of ownership if the couple has an existing mortgage or plans to refinance down the line.

2. A living trust as tenants by entirety. The law now allows a couple to hold title to their primary residence in a trust (or trusts) as tenants by the entirety. So the couple gets the probate avoidance of the trust and the asset protection of tenancy by the entirety. The trust/tenancy by entirety law is new as of January 1, 2011. I like this form of ownership for properties that have no mortgage and where there are asset protection concerns or a high liability job.

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Long term occupant applications mailed in Cook

June 2, 2011Real estate taxtsammons

Cook Co. is riddled with real estate tax exemptions and the long term occupant exemption is a strange, stealth exemption that I have never liked much.

It’s not mentioned much on the Cook County Assessor’s website and no one understands it.

The exemption is a substitute for the homeowner’s exemption, but the benefit of it is that there is no cap, so the savings can be more than the typical homeowner’s exemption.

To qualify you need:

1. Owned your home from 1/1/00 to 1/1/10 (10 years).

2. Household income of less than $100k.

3. A big assessment increase (that’s basically everyone).

The assessor just mailed packets to those of you deemed worthy. There is no form on the site to apply for the long term occupant exemption, so you have to rely on the mailed form (which is vintage 1960). The application has to be filed by June 22.

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High earners & short sales

May 26, 2011foreclosures-shortsales, Strategic Defaulttsammons

This week I spoke to two clients, both of whom had six-figure salaries, about whether a short sale would be best for them.
High earner Case 1: Client was in the middle of a short sale (and was calling for a second opinion). He owned three properties and the one being short-sold was $100k underwater. It used to be his primary residence, but he rented it out for two years before starting the short sale. There were two mortgages. The first mortgage company wanted him to sign a promissory note for $8000 payable over 10 years. The second mortgage company wanted $10,000 cash contribution from him to allow the short sale. The client had $70k in credit card debt. The client wanted to know if he should complete the short sale or bail out and let the foreclosure be completed.

I would not have recommended a short sale in this case, because the client will have 1099 income after the short sale since this was not his primary residence. Also the second mortgage was refusing to release him from liability even though he had to pay them. He would have been much better off filing a chapter 13 bankruptcy which would vaporize the 1099, control the credit card debt with no interest and allow him to ditch all liability on the second mortgage.

High earner Case 2: Client bought a condo for his Mom (I can’t believe the number of people who bought properties for family members between 2004 and 2008-there are tons of them) Client earns $150k per year. Client paid $120k for the condo and put down 20%. The condo is now worth $40,000! So the down payment is gone and the condo complex is riddled with foreclosures and short sales. In fact, the complex is close to being a zombie complex in which FHA or conventional financing can’t be obtained because of the lack of reserves and high delinquency rate. The condo dues were almost $400/mo. Since it was not his primary residence, there will be 1099 income after a short sale or foreclosure.

I like short sales where there is only one mortgage, but the client was reluctant to try it for two reasons: There will be 1099 income after a short sale and, due to his high income, the short sale lender would ask for a high contribution from him to allow the short sale to close. The client pretty much concluded it would be better to strategically default on the unit, skip the short sale and take the hit to his credit and pay the 1099 income at the end of the foreclosure.

Here are some of the problems with short sales and high earners:

1. No hardship. The owner is supposed to show a hardship. Sorry, but it’s going to be hard to come up with credible hardship letter when you make $150k annually. Luckily, most lenders are pretty flexible about what entails a hardship and it’s more likely that the lender will try to extract cash from you than deny your short sale for lack of hardship.

2. Have to furnish bank statements/ tax returns. High earners are very wary about furnishing bank statements and tax returns to the short sale lender. They are afraid that the lender will use this info to try to collect from them later. I have not found that to be the case, but this is a pretty pervasive fear among the high earner/short sale set. Most will not even consider a short sale when they hear that they have to hand over tax returns and bank statements.

3. Negotiator is a debt collector (not your friend). The lender appoints a “negotiator” to work on your short sale. This person is a glorified debt collector and once he or she sees your Vail ski condo or $75k in your bank account, they will ask you to contribute to the short sale. This is either in the form of a promissory note over 5 or 10 years or a cash payment. Both first and second mortgages may ask for contributions. I think contributions are fine as long as the lender releases the debt and forgives any deficiency. If the lender does not release any deficiency, what is the point of making a contribution? The contribution needed for release on a second mortgage will often be very high, making the whole short sale illogical at best.

4. Even if you keep current, credit will decline. Some high earners try to keep current on the mortgage payments during a short sale hoping their credit will not suffer. Unfortunately, I have found that the credit score will still decline by 150-200 points after a short sale even if the payments are kept current.

5. Second mortgages are a pox. Any property with a second mortgage will continue to be a lingering problem after a short sale. It’s likely the second mortgage lender will file a collection action, get a judgment and garnish your wages after the short sale. So what exactly was the point of the short sale?

When to try it:

I think a short sale of a primary residence is worth pursuing for a high earner who has only a first mortgage (no second mortgage) where the owner can get a release of liability. Even if the owner cannot get a release of liability it may still make sense, since most first mortgage holders don’t pursue the owner after a short sale closing.

When to pass:

Reluctant disclosers. Clients who are wary of disclosing tax returns and pay information to the lender should not consider a short sale.

Second mortgages. There is rarely a reason to short sell a property with a second mortgage because it’s likely the second lender will pursue you after closing and your credit will decline as much as a foreclosure. Or they will ask for a large contribution, making the whole thing uneconomical.

Investment properties. For investment properties, the 1099 income after a short sale will be brutal. Also, the lender may pursue you for a deficiency, so it’s often better to consider filing a chapter 13 bankruptcy to erase the 1099 income and release any deficiency balance. Most high earners won’t meet the strict means test to qualify for a chapter 7 bankruptcy.

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Extranet mobile version puts case in palm of your hand

May 13, 2011Technologytsammons

In 2007, I started using a client extranet. An extranet is website that helps speed up and organize communication in a case because it keeps a record of all messages and files, tracks deadlines and notifies everyone when something is updated. I use it for a real estate closings and trust administration.

This one was a winner from the start.

I like techo-things a lot (perhaps too much). So I go down a lot of blind alleys and try and cancel various software and apps. The extranet software has been hands down the greatest thing known to mankind (how’s that for hyperbole) because clients love it and it increases my productivity. I really don’t think I could function without it and clients rave about it, except the occasional technophobe with an aol address who “can’t log in.”

Now, there is a mobile version of the extranet software that makes it easy to use the extranet from your smartphone.

This is not an “app,” but a full functioning version of the extranet that works on virtually any smartphone.

My extranet is located here. To use the mobile version, the client just clicks that link in the browser on their phone and the extranet is available in the palm of their hand. I use the mobile version all of the time on my Iphone to post updates when I am on the road and it works flawlessly. Here’s a short video that shows it in action.

On the technology front, I am also currently in love with Fuzemeeting, which is an online meeting software program similar to Go to Meeting. I often use it to meet to meet online with clients who can’t come to the office or to go over living trusts before signing them. I rarely use the webcamera option since no one seems to like it.

The advantage of Fuzemeeting: Cheaper by almost half than Go to Meeting. Also, meetings can be hosted from an IPad or other tablet computer like the new ASUS Transformer that I am also obsessed with. Go to Meeting doesn’t allow meetings to be hosted on an IPad or tablet.

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The costs of skipping a house payment

April 29, 2011Bankruptcy, foreclosures-shortsales, Strategic Defaulttsammons

What kind of damage to your credit happens after 1 missed mortgage payment?

Oddly, it depends on if you have good or bad credit to start with. Those with good credit suffer more than those with bad credit. (Answer: It’s about a 60-100 point drop in your FICO score for one missed payment.)

This great post talks about the effects of missed mortgage payments, short sales, foreclosure and bankruptcy on the owner’s FICO score. The post refers to a chart on the FICO blog that details how these events affect credit scores and how long it takes to recover from each one.

This is required reading for anyone weighing their options among foreclosure/short sale/bankruptcy.

Most interesting to me was that your credit suffers more if you have a deficiency balance after a short sale than if there is no deficiency balance. I find that deficiencies are NOT forgiven in most short sales, so the credit effect of a short sale with no release is the same as a foreclosure!

I review the credit of many clients and most of them are around 520 to 600 after they have missed three mortgage payments (much lower than indicated in the chart).

As far as recovery of credit after goes, one can get a new FHA mortgage with a 620 FICO score (after the required wait), and that’s not too much of a leap from even the lowest levels listed.

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How many mortgages really get loan modifications?

April 15, 2011Mortgagestsammons

The last three clients I spoke to were approved for loan modifications. About 20 before that were shot down.

The reductions in their monthly payments (among those approved) were from $500 to $1300.

I am so overwhelmingly negative and cynical about loan modifications that I don’t like to even hear myself talk about them. I sound worse than some crabby, old guy on the SCORE complaining about the White Sox bullpen.

I do believe that loan modifications are too hard to get and that they lead many homeowners down the path to foreclosure, instead of helping them.

This cool graph that shows how many loan modifications are cancelled and how many become “permanent” and it shows the percentages for each at all of the major lenders. Of all of the trial modifications applied for, about half are cancelled. It was surprising to me that there are such differences between lenders in the number of modifications made permanent.

Considering that half of those who get loan modifications end up in default again (after the modification) I still consider loan modification a long shot.

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Update: Quirks of buying FNMA foreclosure

March 31, 2011foreclosures-shortsales, Real Estate-Purchasestsammons

This month I did four closings for clients buying foreclosed homes owned by Fannie Mae (FNMA). FNMA mortgages account for well more than 50% of the mortgages in the universe and its Homepath website lists all of the FNMA foreclosures currently for sale. Many of the foreclosed homes on the market (also known as “real estate owned” (REOs)) are FNMA owned, so if you are buying a foreclosure, its likely that it is FNMA owned.

Buying a FNMA home is easier than buying a short sale, but harder than buying from a seller who’s not in foreclosure. In October 2009, I wrote about the quirks of buying a FNMA foreclosure. Buying a FNMA is still as quirky as Napoleon Dynamite on a first date, but it’s a little easier than it was in 2009. Here’s an update on what to expect if you buy a FNMA foreclosure:

1.The infamous addendum still exists. This is a rider that goes on the standard real estate contract. The addendum is hard to understand. It still takes about one week from the time the offer is submitted to get the final signed contract and addendum back from FNMA. Most of the time, we get the final signed contract back faster now than we did in the past.

2. Acknowledgement Date Confusion. The FNMA Addendum still has a weirdo clause that says the inspection contingency starts on the date of verbal “acknowledgement” of acceptance of the offer by FNMA. No other REO sellers do this, only FNMA. Be sure to set up your inspection right away, or ask in writing for an extension of the inspection contingency, so that you don’t accidentally blow the contingency date. I really wish they would get rid of this and just start from the date of acceptance of the contract. I have not had any problems with this, but you have to be on top of scheduling the inspection and do it right away.

3. Dewinterizing for Inspection. All REO sales are winterized, meaning the water and utilities are shut off. You need them turned on to inspect the property. Back in the good old days of 2009, FNMA often forced the buyer to dewinterize the property which was a hassle because you had to have a plumber there to plug the two thousand leaks that sprung when the water was turned on. Thankfully, FNMA now almost always dewinterizes the house before the home inspection instead of passing it off on the buyer, which is good. In my experience, you are unlikely to get any credits after the inspection and FNMA will not agree to repair anything. Unfortunately, clients rarely listen to me on this and insist on bringing up a long list of repairs that FNMA always rejects.

4. Title Insurance, Transfer tax and survey. FNMA used to try to get the buyer to pay for seller’s title insurance and often tried to get the buyer to pay for the village transfer tax. I find that they don’t do this much anymore. FNMA will not provide a survey and never has. They now always pay for title insurance and usually pay for the state, county and municipal transfer tax. I always confirm that they will pay for these in my attorney approval letter.

5. Penalties for closing late. The addendum has some wicked penalties for closing late. Generally, the reason one would close late is because the mortgage approval is delayed. As long as the mortgage contingency extension has been requested there will not be any penalties. Recently, I have not had any client pay a closing delay fee, so FNMA seems to have lightened up. FNMA attorneys often randomly say “the house is going back on the market if you don’t close by Friday.” All extensions, whether for the closing date or the mortgage contingency, have to be signed by the Buyer and have to be on the FNMA form. This is annoying, but it’s just how it’s done.

6. Keys at closing. FNMA homes supposedly are all “keyed” the same with one master key. So the addendum said that no keys will be given at closing and a few times the listing agent demanded back all keys at closing. The poor buyer closed on the home and couldn’t get in without calling a locksmith. Now they are supposed to charge a $120.00 re-key fee to the buyer, but they do furnish a key at the closing.

7. Other issues.

-Like most REO closings, no seller’s representative attends closing and it can still take up to 48 hours to get the seller to sign the closing statement. The buyer cannot move in until the seller signs the closing statement. This is pretty obnoxious, but lately the seller has been signing the closing statement within a few hours of closing.

-Be sure to check the water bill because it is often missed and should be paid in full by FNMA at closing.

-If you are buying a condo from FNMA, be sure to ask them to pay the 6 months dues from the prior foreclosed owner. Even though this can be passed to the buyer under Illinois law, FNMA will usually pay it. It often takes up until the closing date to resolve this issue. Don’t give up on it.

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Garbage can charges morph into loan origination fee

March 19, 2011Mortgages, Real Estate-Purchasestsammons

I’ve had several buy closings in the last few weeks and it’s surprising to see how much closing costs have increased since the new Good Faith Estimate (GFE) rules began in January 2010.

It used to be that all lenders charged several “garbage can charges” (my cracker barrel, semi-derogatory term for excessive closing costs) on the RESPA.

In the old days, common charges were a tax service fee of $70, flood plain check fee of $29 and some sort of document preparation fee of $200 or so. Standard, non-gouging garbage can charges usually added up to about $300. There were exceptions to this and many times we would see ridiculous add-ons like “table funding fee” and “loan administration fee” from $300 to $1200.00.

When the new GFE law started, all the garbage can charges were bundled into one “Loan Origination Charge” on line 803 of the RESPA closing statement. The charges are no longer broken down separately, but all appear as one lump sum. Buyers have no control over title charges and the other costs on the RESPA. Line 803 is really the only item that a buyer can control. But, Line 803 costs have risen over the last year, mostly because buyers don’t questions the cost. Here is a summary of what I have seen over my last few closings:

1. Buy of Rolling Meadows foreclosure Origination charge $1749.00

2. By owner buy of Palatine condo Origination charge $1295.00

3. Buy of Northbrook home Orgination charge $1580.00

4. Buy of Carpentersville foreclosure Origination charge $3131.00

5. Buy of Palatine home Origination charge $650.00

If I were buying a home, I don’t think I would pay more than about $600 for origination fees. I have no idea why origination charges have become so inflated. The average of the above five closings is over $1600.00 and I think that is way too high. There is no reason or purpose for these charges other than extra income for the lender. (Note: If your lender is a mortgage broker, there is a complex interplay of the “yield spread” paid to a mortgage broker from the underlying lender into the line 803 costs, but in the risk of boring you to tears, I’m not going to torture you with an explanation of that here. But, it’s not the yield spread that is making these costs higher.)

Closing number 4 above is a case of classic overcharging with a whopping $3131.00 origination fee. I always suggest that clients send me the GFE to review before they go ahead with the loan. My clients did not send it to me in that case. The first time I saw it was at the closing. The loan officer told them it was his “standard charge on an FHA mortgage.” Being trusting souls, they agreed to the overcharge and the lender made an extra $2k. FHA places no limit on how much can be charged for an origination charge. It is strictly up to the lender to charge what they want on an FHA and it is negotiable.

So if you are refinancing or buying, beware of the origination charge and try not to pay more than $600.00.

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Cook senior exemption now requires annual application

February 16, 2011Real estate taxtsammons

The exemptions for Cook Co. real estate taxes are like some sort of Byzantine maze.

There are seven different exemptions and here is a breakdown of them.

The collar counties (Kane, DuPage, Lake, McHenry) make tax exemptions simple. Getting and keeping exemptions is easy there. In Cook County, the exemption applications and renewals have become an unnecessary, bureaucratic tangle.

Now, Cook requires an annual application for the senior exemption. The new 2010 form is here. Be sure to apply for this one right away. Previously, this was automatic from year to year, but that was too simple so the assessor mailed out 300,000 applications. What are the chances that half of those will be signed and returned?

The 2010 senior freeze exemption, that freezes the assessment of seniors earning under $55,000.00 per year, is now online too. This one has always required an annual application because it includes last year’s income tax figures.

Don’t let the Cook Co. tax maze stop you from getting the exemptions you deserve.

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Do I still need a trust with the new estate tax law?

February 5, 2011Inheritance tax, Living Truststsammons

There were big changes in the inheritance tax laws recently. For the most part, the changes affect only the super-rich (estates of over $5 million).

But, a number of clients have come in for living trust review appointments lately wanting to know if they should get rid of their trust because of the changes in the estate tax laws. My policy always has been to meet with existing clients annually for a free review of their trust. This encourages clients to come in (since they know they won’t get a $300 bill) and it helps keep trusts up to date and properly funded.

Several clients have asked if they should just ditch their trust due to the fact that the estate tax doesn’t start until $5 million in assets. The short answer: Keep the trust.

Here’s why:

1. Avoiding Probate. Revocable living trusts avoid probate. The filing fees and other costs for a Cook County probate are now around $700.00 and attorney’s fees will be about $2000.00. Clients don’t like this and can sidestep these costs by using a trust.

2. Estate tax limits change every five minutes and will soon go back to $1 million. For 2011 and 2012, the estate tax exemption amount is $5 million. But, this will change again in 2013 back to $1 million. Living trusts for married couples often use a formula that sets up A/B or family/marital trusts upon the first spouse’s death. The purpose of this is to avoid estate tax on the amount in the family trust of the first spouse to die. I think it’s best to keep your A/B trust intact if you are a married couple since you will need it when the amount clicks back to $1 million in 2013. The A/B trust protects the surviving spouse’s assets from creditors and insulates the assets in the event of remarriage.

3. Portability won’t last. Under the new law, married couples won’t even need A/B trusts because of the new concept called “portability.” This means if one spouse dies without a trust, the surviving spouse can file an inheritance tax return for the deceased spouse and claim the funds in the deceased spouse’s name as exempt from inheritance tax, even if the deceased spouse did not have an A/B trust. Wow, confusing, huh? The problem with this: It forces the survivor to pay to file an inheritance tax return (not cheap) on the first death and both spouses must die by the end of 2012 for it to “work.” And the clients still has to find a way to avoid probate on all of their assets. So it’s crazy for a married couple to get rid of their trusts because of portability.

For a nice summary of the many changes brought by the estate tax law, please read a series of posts by a Chicago lawyer that cover in detail and with clarity the many changes to the estate tax laws.

Here are a few that you should be aware of :

1. Illinois tax kicks in at $2 million. The Illinois inheritance tax used to run parallel with the federal tax. Not any more. If you have a large estate, the best solution to this problem is to buy a foreclosed condo in Florida and become a Florida resident since it has no state inheritance tax or state income tax.

2. Gifting can go up to $5 million lifetime. It used to be that the lifetime limit for gifting was $1 million. Now it’s $5 million, which is sweet, especially if you are the progeny of a rich dude.

So don’t ditch your living trust, just be sure that it says what you want it to say and that it’s properly funded with life insurance, real estate and the other fruits of your labor.

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Law News

Estate planning and real estate in the Land of Lincoln

Real estate and the Illinois Civil Union Act

Long term occupant applications mailed in Cook

High earners & short sales

Extranet mobile version puts case in palm of your hand

The costs of skipping a house payment

How many mortgages really get loan modifications?

Update: Quirks of buying FNMA foreclosure

Garbage can charges morph into loan origination fee

Cook senior exemption now requires annual application

Do I still need a trust with the new estate tax law?